Financial Aid—Loan programs

Federal Policy Priorities

Support a legislative change to require mandatory institutional certification of private loans issued by lenders. This will help ensure that students and families fully utilize less expensive federal and state financing options, such as subsidized and unsubsidized federal Stafford Loans and PLUS Loans, before utilizing more costly private loans.

Support revising the bankruptcy code to permit the discharge of private educational loans in bankruptcy proceedings to provide greater protection to borrowers faced with unmanageable student loan debt burden.

Ensure that the Department of Education delivers high-quality service through the Direct Loan program process, especially with regard to adequate and timely information, early outreach to delinquent borrowers and more accommodating recovery efforts for borrowers in default. (move to Summary narrative)

Interest rates on all federal Direct Loans should become variable and be set at a reasonable level above the cost of issuing capital for the government.

Support legislation requiring the Department of Education to promptly contact delinquent borrowers in the Direct Loan Program, in order to avoid default.

Encourage the Department of Education to utilize all necessary federal and institutional sources to maintain contact with borrowers during the six-month post-graduation grace period so that they can successfully enter repayment.

Support a requirement that immediately assigns any federal Stafford Guaranteed Loan that is past due for a specified period of time to the Department of Education. The department should immediately inform the borrower of the full range of repayment options and assist in selecting an option most appropriate to the financial circumstances of the borrower.

Support a change in federal student loan policy that collects only the amount that is currently due and manageable instead of adhering to a practice of declaring the entire loan amount to be due. Such a change in policy would allow borrowers to cure their past-due status and mitigate the accumulation of excessive collection charges and fees (given that) collection agencies are able to assess penalty fees based on the entire loan rather than just the payments due to date.

Summary

Beginning on July 1, 2010, the federal government became the single entity issuing federal student loans which is known as the Direct Loan Program. Prior to that date, both the federal government and other private market lenders issued federal student loans. While the federal government had experience in issuing student loans as the inception of the Direct Loan Program dates back to 2003, the federal government only provided about one-third of the total federal student loans in any given year. For academic year 2012-2013, the total volume of federal loans issued to students is estimated to be about $114 billion supporting over 22 million loans. The administration anticipates that 22.5 million loans will be issued totaling over $120 billion in academic year 2013-2014.

Federal loans have limits placed on the amount a student may borrow dependent on the enrollment year of the student. A first-year student is limited to borrow $5,500, while a second-year student may borrow $6,500, while third-year students and above may borrow up to $7,500. There is a lifetime limit of $31,000 on the student (the limits mentioned here are for dependent undergraduate students). Limits for independent and graduate students differ and are significantly higher.)

Currently, the interest rate for a Stafford Loan is 3.4% while unsubsidized Stafford Loans and student PLUS loans have an interest rate of 6.8%. The 3.4% interest rate was established in the College Cost Reduction and Access Act of 2007 in an annually stepped-down approach from 6.8%. There are nearly 23 million borrowers receiving federal Stafford, subsidized and unsubsidized, loans. Only 7.5 million receive subsidized loans and have the benefit of the 3.4%. Further, the federal government is issuing federal loans at an extremely low cost. Nearly all interest paid by the student goes directly to deficit reduction. The federal government should not be relying so heavily on student borrowers to finance deficit reduction. Therefore, AASCU would support a new interest rate for all federal loans that more accurately reflects the cost of issuing the capital to the government. This new rate would be variable and could be about 1.5 percent above the appropriate federal note, such as the 10-year Treasury Note.

In addition to federal loans, students may also seek loans from private banks for educational expenses. These are sometimes referred to as “gap loans” since they are used to make up the difference or gap between the cost of attending an institution of higher education and the amount received through federal, state, and institutional grant aid, federal loans, and federal work-study monies.

Students should always exhaust federal loan options before opting to pursue loans through private market lenders. Federal student loans have a number of benefits to private loans which include:

Subsidized loans—For lower-income borrowers all or a portion of their federal loan may be subsidized. This simply means that the federal government will “pay for” the accruing interest while the individual is enrolled as a student.

Same low interest rate for all borrowers—The rate is currently 3.4% for subsidized loans and 6.8% for all other loans (even in this low-interest rate market, private lenders are not offering student loans below 6.8%, but if they are, they are being issued to low-risk borrowers.)

Flexible repayment options—The federal government has two programs that ease the burden of repaying loans by basing a borrower’s repayment amount on the individual’s income. They are the Income Contingent Repayment (ICR) and the Income Based Repayment (IBR) Programs. In addition, to IBR and ICR, the federal government offers deferments based on severe circumstances and can even completely forgive loans.

The transition to 100% federal loans issued through the Direct Loan Program has exposed some weaknesses of the Department’s capabilities in the areas of servicing and collection. Constant vigilance of Department of Education activities must be maintained in order to protect the borrower.

Another area of growing concern is student loan defaults. AASCU believes that given the tools available to the Department of Education it should be extremely difficult for a borrower to enter default. As such, AASCU has taken a number of policy positions around default prevention. The tools available to the department primarily include Income Based Repayment (IBR) and Income Contingent Repayment (ICR). Borrowers who have either a DL or FFEL loan that have reached a specified period of time in delinquency, but before default, should have their loans transferred to the government so that these tools can be applied. Special handling should be established for those borrowers who have recurring repayment problems. According to department data, lack of up-to-date contact information is the major cause of loan defaults. As such, institutions have a role and responsibility in assisting the department with maintaining continuous contact with borrowers.